Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Saturday, 30 August 2014

Gillian
Tett devoted an entire article
in the Financial Times on Friday to making the point that the $100bn of fines
imposed on banks in the US recently is largely fatuous because it fails to
punish those responsible. Second, the ACTUAL PEOPLE punished, i.e. shareholders
are not guilty. And third, much the biggest effect will be to raise the return
demanded in future by bank shareholders. After all, if you’re going to have to
pay billions in fines for the crimes of others, you’ll want a reward for doing
so.

That
point of Gillian Tett’s is hardly original. Sundry economics bloggers have
already made that point. E.g. me here.

Wednesday, 27 August 2014

I argued
yesterday
that the cost of raising bank capital requirements to 25% or even 100% was
zero, because that’s what the Modigliani Miller (MM) theory says. I also
pointed out that criticisms of MM are feeble.

After
a bit of Googling and rummaging around, I now find that the criticisms are even
more feeble that I thought. Details as follows.

Lev
Ratnovski in a Voxeu paper
entitled “How much capital should banks have” suggests just two possible
weaknesses in MM. One, (para starting “There are two ways…) is that if you
ASSUME the return on bank capital is 15% and the return on bank debt is 5%,
then the more capital there is, the higher the cost of funding the bank. Well
of course, but it’s PRECISELY the latter sort of 15%/5% assumption that MM
proved to be a nonsense. Ratnovski’s point there is a bit like saying “assuming
the Earth is flat we wouldn’t be able to have weather satellites”.

The
second possible weakness in MM that Ratnovski cites is the taxation point I
referred to yesterday, and which, as I explained yesterday, is nonsense. Plus
Ratnovski cites another paper on MM (by Anil Kashyap and
others). But that paper ALSO has no criticism of MM other than the latter
flawed tax point (see p.4 in particular).

MM
passes the test with flying colours.

The
conclusion is that while the PROCESS of raising bank capital may involve
temporary or transient costs, a permanent and higher capital ratio (25%, 50% or
even 100%) is costless.

Or
to be more exact, it brings net benefits in that bank subsidies and state
support for banks is removed.

Tuesday, 26 August 2014

He
wrote an article in the Financial Times some time ago entitled “Seven Ways to
Clean up our Banking Cess-pit”. See here or here. He
advocated a HUGE increase in bank capital ratios: up from the present 3-6% to
about 25%: quite right.

However,
he argued AGAINST raising that still further to 100%, which would amount to
full reserve banking. And his reason was:

“I accept that leverage of 33 to one, as
now officially proposed is frighteningly high. But I cannot see why the right
answer should be no leverage at all. An intermediary that can never fail is
surely also far too safe.”

The
answer to that is: “it all depends on the cost of attaining total and complete
safety”. If the costs are zero, then total and complete safety makes sense.

And
in the case of banks, the costs of total and complete safety ARE ZERO, and for
reasons spelled out by Messers Modigliani and Miller. As M&M correctly
pointed out, the costs of funding a given bank which engages in a given set of
activities and hence takes given risks is a GIVEN. Thus the charge made by
those covering the risk is a given. Thus if the charge is spread over a larger
number of “risk carriers” i.e. shareholders rather than a smaller number, there’ll
be no change in the TOTAL CHARGE made for covering the risk. Thus moving from
25% to 100% involves no costs.

The
M&M theory HAS BEEN criticised, but I’m not impressed by the criticisms. About
the most popular criticism seems to be that the tax treatment of bank capital
and bank debt is different, thus, so the argument goes, M&M does not work
out in the real world in the same way as it does in theory. For example that is
the first criticism listed in a paper
by three Bank of England authors entitled “Optimal Bank Capital” (p.9).

However,
that “tax” criticism is feeble. Reason is that tax is an entirely ARTIFICIAL imposition.
Thus for the purposes of gauging REAL costs and benefits, tax should be
ignored.

The
second criticism of M&M in the latter paper is that the charge made for
deposit insurance may not reflect the risk. Well the answer to that is much the same as
the answer to the above “tax” criticism: for the purposes of gauging REAL costs
and benefits, any “incorrect” or artificial charges should be ignored. That is,
in such cost / benefit calculations or arguments, correct or accurate charges should
be assumed, even if those are not the charges that obtain in the real world.

Monday, 25 August 2014

When
someone keeps screaming the same point from the rooftops despite it having been
explained to them they’re talking nonsense, then I start getting abusive.
Anyway, details are as follows.

On
26th April this year Ann Pettifor published an article
claiming that full reserve banking (FR) had similarities to monetarism:
allegedly a flaw in FR. I pointed out why her monetarist point did not stand inspection
in a comment
after the article (the first comment) actually.

But
rather than take heed of my criticism, she went on to have her article
re-produced, using slightly different wording on two other sites: on the Open Democracy (on
1st May).the IDEA
site (on 25th June), and on the IPPR
site. Plus she did a tweet in the last week or two making the same nonsensical
monetarist point.

Clearly
Ann Pettifor is convinced she has an important message for us, so let’s examine
it.

Incidentally
her articles are garbage from start to finish, and I’ll deal with some of this
nonsense in forthcoming posts, but for the moment I’ll just deal with the
monetarist point.

Her
actual REASONS for comparing FR to monetarism in the original and two subsequent
articles are near non-existent. In the original article she simply claims that
advocates of FR think (I’ve put her words in green):

“it is possible to manage aggregate economic activity
within an economy like Britain’s if an “independent committee” can just
pre-determine money growth, and then shrink or expand activity. This is very
close to what monetarists tried to achieve….”. And
that’s it!

And
in the IDEA version of her article all she says by way of supporting the
“monetarist” charge is: “…the notion
to my mind is preposterous. It is an approach reminiscent of the misguided and
failed monetarist policy prescriptions for controlling the money supply in the
1980s.” And that’s it
(again).

OK
let’s examine this (in a lot more detail than Ann Pettifor is able to).

Monetarism
at its simplest and most innocent is simply the idea that the quantity of money
has an effect. Indeed even the mentally retarded have doubtless tumbled to the
fact that if the state printed a billion tons of £20 notes and distributed them
to all and sundry, there would be an effect (to put it mildly). Plus about 99%
of economists agree with the “mentally retarded” so to speak.

As
to monetarism a la Milton Friedman, that takes the above idea much further:
claiming that the economy is best regulated PURELY by adjusting the money
supply. That’s clearly more debatable.

Thus
in claiming that FR (or indeed any other idea in economics) is similar to or
amounts to monetarism, it is VITALLY IMPORTANT to explain EXACTLY where the
idea lies on the above “innocent-
Friedman” scale. If the idea is at the innocent end of the scale, then the
“monetarist” criticism is no criticism at all. But Ann Pettifor can’t be bothered
with or doesn’t understand the above sort of details.

The fiscal element.

The
next absurd element in Pettfor’s criticism of how the allegedly “monetarist”
stimulus is effected under FR is that that mode of effecting stimulus has
actually been implemented big time over the last three years or so – without
any “monetarist” objections from Ann Pettifor far as I know. Details are thus.

Over
the last three years we’ve implemented fiscal stimulus and followed that by QE.
Now the former consists of government borrowing £X, spending £X and giving £X
of bonds to lenders, while QE consists of the state printing money and buying
back those bonds. But that simply nets out to, or comes to the same thing as
the state printing £X and spending it, which is what the allegedly “monetarist”
stimulus under FR consists of! Perhaps Ann Pettifor hasn’t heard of QE.

Fiscal matters – continued.

Next,
Ann Pettifor seems to be unaware of the fact that when the state prints and
spends money, the stimulatory effect DOES NOT come purely from the money supply
increase. That is, the simple fact of spending more money on say education and
health results in more people being employed in schools and hospitals (revelation
of the century, I don’t think). As to the “monetarist” effect, that’s entirely
separate.

Indeed,
therein lies one of the beauties of COMBINING monetary and fiscal stimulus in
the above way. That is, economists are far from agreed on how effective fiscal
and monetary stimulus are, thus it’s not a bad idea at all to combine the two!
If in fact one is near useless, while the other is effective, then combining
the two is bound to work.

The next absurdity.

The
next absurdity in Pettifor’s “monetarist” criticism is that the latter “print
and spend” policy is not advocated JUST BY supporters of FR. Ann Pettifor will
be devastated to learn that plenty of economists who are NOT famous for
supporting FR (and may not support it at all) actually favour the print and
spend policy. For example advocates of Modern Monetary Theory tend to favour
simply creating and spending base money in a recession.Plus Claude Hillinger, a German economist
advocates print and spend. See paragraph starting “An aspect of..” on p.3 of
his article here. Plus
Simon Wren-Lewis (Oxford economics prof) advocates “print and spend” (albeit
just at the zero bound).

Plus
Keynes advocated the idea. As he pointed out in a letter to Roosevelt in the
1930s, stimulus can be effected by increased government spending funded EITHER
BY borrowing or by “printed money” as he put it. See 5th paragraph
of his letter.

Other bits of Pettifor nonsense.

Readers
will have noticed that it’s taken me about a thousand words to demolish
approximately ONE SENTENCE in Pettifor’s articles. That is, I’ve had to set out
some basic elementary economics and in detail to explain where she’s gone
wrong.

Unfortunately,
the rest of her articles contain plenty more elementary errors. But in a way,
that’s a good strategy: i.e. pouring out a torrent of emotionally appealing and
plausible sounding nonsense is a great propaganda ploy: your opponents will
have to expend a huge amount of time demolishing the nonsense.

And the
word “monetarism” is a favourite “hate” word for lefties. So just trott out the
“monetarist” charge and you’re on to a winner. Not that I’m suggesting that
“righties” is any less naïve.

Saturday, 23 August 2014

Congratulations to Positive Money for their survey to find out whether UK politicians know where money comes from.

Incidentally
there might seem to be a clash between my above agreement that loans create
money, and item 3 in the left hand column which suggests that loans do not
create money. The explanation is that loans certainly create money AT THE INSTANT
that loans are made. However, when borrowers spend the money they’ve borrowed,
there is a tendency for RECIPIENTS of that money to put their newly acquired
pile of cash into term or deposit accounts, and so called money in such
accounts is often not counted as money. To that extent, the above INITIAL money
creation is nullified.

This
is a complicated area, but there’s more on this point in sections 1.12 and 3.1
of the MPRA paper on the left.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A